Stocks: Losers and Gainers

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Buffett Indicator: UK Stock Market Valuations and Expected Future Returns

Updated at Sun, 24 Jan 2021 20:30:05 -0600
Country: UK (updated daily) check out Global Overview for detailed methodology.

The Stock Market is Modestly Undervalued.

Ratio of total market cap over GDP: Recent 20 Year Maximum - 164.92%; Recent 20 Year Minimum - 72.42%; current - 96.44%
Expected future annual return: 8.3%

ETF Used for dividend yield: EWU (Yield=2.89%)
Market Index used: FTSE 100 index
Current Annual GDP: $3,095 billion US dollars or 2,259 in billions of national currency (GDP in Local Current Prices Annual Growth=3.29%)
Data since year 1972

UK Historical GDP Growth

Historical GDP of UK in billions of national currency. The GDP in local current prices has grown at the annual rate of 3.29% over the past 8 years. Please note this growth rate includes the effect of price inflation and it is NOT the real GDP growth rate. Current Annual GDP: $3,095 billion US dollars or 2,259 in billions of national currency.

UK GDP (Billion, National Currency)

Historical Stock Market Cap

Historical total market of UK in billions of national currency. This value is normalized using the data published by WorldBank. FTSE 100 index is used for the normalization. Represents about 80% of total market index in UK, back to 1982. Use total market cap number of 1.8 trillion pounds as of June 30, 2011 to normalize FTSE All share index to total market cap.

UK Total Market Cap (Billion, National Currency)

Historical Ratio of Total Market Cap over GDP (%)

The current ratio of total market cap over GDP for UK is 96.44%. The recent 20 year high was 164.92%; the recent 20 low was 72.42%. If we assume that the ratio will reverse to the recent 20 years mean of 113.73% over the next 8 years, the contribution to expected annual return is 2.08%. This is the detailed historical chart of the ratio.

UK Ratio of Total Market Cap over GDP (%)

Based on these historical valuations, we have divided market valuation into five zones:

Ratio = Total Market Cap / GDP Valuation
Ratio ≤ 80% Significantly Undervalued
80% < Ratio ≤ 102% Modestly Undervalued
102% < Ratio ≤ 125% Fair Valued
125% < Ratio ≤ 148% Modestly Overvalued
Ratio > 148% Significantly Overvalued
Where are we today (2021-01-25)? Ratio = 96.44%, Modestly Undervalued

Predicted and Actual Returns

From the equation presented on the U.S. market valuation page,

Investment Return (%) = Dividend Yield (%) + Business Growth (%) + (Re/Rb)(1/T)-1

We can compute the predicted and actual returns of the UK stock market over a given time period, T. In the calculation, we set T to equal eight years, the approximate length of a full economic cycle. The calculated results are presented in the chart below. The green line indicates the expected, or predicted return if the market ratio trends near the recent 20 years average ratio of 113.73% over the next eight years.

The blue line indicates the actual, annualized return of the UK stock market over eight years. We use “FTSE 100 index” to do the actual return calculation. We can see the calculations largely predicted the trend in the stock market as the blue line is closely parallel to the green line.

Predicted and Actual Returns of UK


The stock market of UK is expected to return 8.3% a year for the coming years. This is from the contribution of economic growth in local current prices: 3.29%, Dividend Yield: 2.89% and valuation reverse to the mean 2.08%.

This is the projected return of the stock market in UK relative to other countries. Click on each bar in the chart to go to other countries:

You can go here to see what international stocks Gurus are buying.

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